meaning of cost center
This query is : Resolved
05 December 2008
Hi
what is the meaning of cost center and profit center. please explain with an example
what is the meaning of cost center and profit center. please explain with an example
05 December 2008
Profit Center
A profit center is an area of your business that you operate with the goal of earning a profit. A profit center also has a well defined output. For instance, "corn" is typically a profit center. If you raise corn you do so with the goal of earning a profit, and the output is easily defined as bushels of corn.
Now, you could identify "crops" as a profit center. That would be OK, but wouldn't provide very detailed management information, partly because the output of "crops" can't be easily defined except in terms of dollars--there's no single common unit of measure across all crops.
Often you may need to break a single "chain" of production down into two or more profit centers to gather figures on which parts of your operation are profitable.
For instance, suppose you raise your own beef calves and market them after a backgrounding period. To know whether you're efficient at producing weaned calves and at backgrounding cattle, you really need to set up two profit centers. You might call the first Beef Cow/Calf and the second Cattle Backgrounding.
After weaning calves you would "sell" production from the Beef Cow/Calf enterprise to the Cattle Backgrounding enterprise, at a fair market price. (Transferring income and expenses between Classes will be discussed in another article.) This credits the Beef Cow/Calf enterprise with income, and charges the Backgrounding enterprise with expense. If you've kept a good record of other income and expenses for the two enterprises, at year's end you'll be able to determine whether both are profitable parts of the farm business.
Cost Center
A cost center is an area of your business that you primarily operate to service the needs of one or more profit centers. A typical example of a cost center may be a combine. Unless you do a lot of custom harvesting you don't operate a combine to earn a profit; but rather, to supply harvesting services to corn, soybeans, wheat, or other profit centers.
The main reason for identifying cost centers in your operation is to figure out how much those services are costing. In the case of a combine, this information can help you make decisions about repair or replacement..."How much did I spend on combine repairs last year?"...or whether you should be hiring custom harvesting instead of owning the machinery yourself.
A profit center is an area of your business that you operate with the goal of earning a profit. A profit center also has a well defined output. For instance, "corn" is typically a profit center. If you raise corn you do so with the goal of earning a profit, and the output is easily defined as bushels of corn.
Now, you could identify "crops" as a profit center. That would be OK, but wouldn't provide very detailed management information, partly because the output of "crops" can't be easily defined except in terms of dollars--there's no single common unit of measure across all crops.
Often you may need to break a single "chain" of production down into two or more profit centers to gather figures on which parts of your operation are profitable.
For instance, suppose you raise your own beef calves and market them after a backgrounding period. To know whether you're efficient at producing weaned calves and at backgrounding cattle, you really need to set up two profit centers. You might call the first Beef Cow/Calf and the second Cattle Backgrounding.
After weaning calves you would "sell" production from the Beef Cow/Calf enterprise to the Cattle Backgrounding enterprise, at a fair market price. (Transferring income and expenses between Classes will be discussed in another article.) This credits the Beef Cow/Calf enterprise with income, and charges the Backgrounding enterprise with expense. If you've kept a good record of other income and expenses for the two enterprises, at year's end you'll be able to determine whether both are profitable parts of the farm business.
Cost Center
A cost center is an area of your business that you primarily operate to service the needs of one or more profit centers. A typical example of a cost center may be a combine. Unless you do a lot of custom harvesting you don't operate a combine to earn a profit; but rather, to supply harvesting services to corn, soybeans, wheat, or other profit centers.
The main reason for identifying cost centers in your operation is to figure out how much those services are costing. In the case of a combine, this information can help you make decisions about repair or replacement..."How much did I spend on combine repairs last year?"...or whether you should be hiring custom harvesting instead of owning the machinery yourself.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- SEC 54 OF IT ACT
- Is Aadhar PAN linking required for opening bank account?
- Where to show the RCM on Rent paid to unregistered landlord
- Form 26QB for TDS on property
- CPC Processing IT Return for AY 2023-24 without recognizing the Taxation Option under New Regime
- Whether still royalty
- Payable outstanding for years disallowance
- BLOCKED-INELIGIBLE GST CREDIT
- Amendment of September 2021 Invoice
- Residential status for filling income tax returns in India
- Deemed to be University shall pay gst on Bus fee collection from students
- Section 194LBB
- Issue of gst e invoice
- Interchangeable words in accounts
- Adjusted profit/Loss in the case of LLP and Pvt. Ltd.company
- How to adjusted advances given or receipt
- Foreign vendor without PAN unable to to register due to non receipt of OTP on foreign number ?
- 133(6) DIN INVALID format error - ->WHERE TO REPLY 133(6) notice?
- Query for dubts
- Regarding Resignation by Auditor from Pvt. Ltd.
Trending Online Classes
-
Excel Mastery Program
CA Rishabh Pugalia
CAclubindia
